PHILADELPHIA, THURSDAY, JUNE 3, 2004
THE OLDEST LAW JOURNAL IN THE UNITED STATES
Internal Inquiry Results: The Disclosure Quandary
BY J. PHILIP KIRCHNER
AND VINCENT J. NOLAN III
Special to the Legal
C
orporations faced with a govern-
ment investigation often must make
a Hobson’s choice: whether or not
to disclose the results of an internal probe.
As the 6th U.S. Circuit Court of Appeals
has stated in this context, “[A]ll litigation-
related tactical decisions have an upside and
a downside.”
When confronted with notice that a gov-
ernment agency is commencing an investi-
gation, typically the company and its coun-
sel will have only limited knowledge of the
facts underlying the subject matter of the
probe.
As a result, counsel will often advise the
company to conduct an internal investiga-
tion. This will usually result in a written
report and other documentation of the facts
discovered for the company board of direc-
tors’ use in formulating its response to the
government investigation.
Invariably, the facts giving rise to the
government’s investigation will also give
rise to — and likely already have spawned
— a number of private lawsuits against the
company and its representatives by its
shareholders and others. The same facts
might also give rise to civil and criminal
actions by the government against the com-
pany and some of its officers, directors and
representatives.
To protect the company’s internal investi-
gation from disclosure to those plaintiffs
and other parties, outside counsel will usu-
ally be retained to conduct the internal
investigation and to draft the investigation
report to the board. In so doing, the compa-
ny can assert that the report and other docu-
ments created during the investigation are
REPRINTED WITH PERMISSION OF THE LEGAL INTELLIGENCER
KIRCHNER NOLAN
J. PHILIP KIRCHNER is a partner in the litiga-
tion practice group at Flaster/Greenberg of Cherry
Hill. VINCENT J. NOLAN III is an associate in
the litigation practice group at Flaster/Greenberg of
Cherry Hill.
protected from disclosure by the attorney-
client privilege and attorney work-product
doctrine.
At the same time, the corporation’s expo-
sure to liability, as contrasted to the liability
of its agents, may turn on the company’s
cooperation with the government’s investi-
gation. The company may enhance its
chances either for avoiding liability or for
leniency by sharing the results of its internal
investigation with the government.
AVOIDING WAIVER OF
PRIVILEGES
Disclosing the company’s internal inves-
tigation report and backup materials to the
government, however, raises the possibility
of waiver of the attorney-client and the
work-product protections. Faced with this
Hobson’s choice, what should counsel do
under these circumstances?
The McKesson Corp. and its outside
counsel, Skadden Arps Slate Meagher &
Flom, found itself in just this situation. On
April 28, 1999, McKesson publicly dis-
closed that its auditors had discovered mas-
sive accounting irregularities in the finan-
cial statements of McKesson’s newly
acquired subsidiary, HBO & Co. (HBOC).
As a result of those irregularities,
McKesson wrote off several hundred thou-
sand dollars of revenue and its stock price
plummeted.
Following its public announcement,
McKesson was quickly besieged by numer-
ous lawsuits by private litigants. The
Securities and Exchange Commission and
the U.S. Attorney’s Office also confronted it
with investigations. Over the next several
months, the SEC commenced civil enforce-
ment actions against several former HBOC
and McKesson officers and employees and
employees of HBOC’s outside auditors, and
some of those same individuals were indict-
ed by the USAO for federal securities fraud.
McKesson retained Skadden to represent
it in the shareholder lawsuits, to conduct an
internal investigation and to represent it in
connection with the SEC and USAO inves-
tigations. Skadden’s internal investigation
resulted in the preparation by Skadden of
numerous memoranda of interviews with
various McKesson employees and a written
report to McKesson’s audit committee.
Prior to completion of its report to the
audit committee and faced with the USAO
and SEC investigations into McKesson’s
conduct, Skadden negotiated confidentiality
agreements with both entities and then later
produced the privileged audit committee
report and interview memoranda for them.
The confidentiality agreement with the SEC
provided that the SEC would maintain con-
fidentiality of the information provided to it
by McKesson, except to the extent required
for the SEC to carry out its duties and
responsibilities or to the extent that the SEC
determined that federal law required that
disclosure.
The USAO also agreed in its agreement
to keep the information confidential, but
could, in its discretion, disclose the docu-
ments to a federal grand jury and could use
the documents in any resulting criminal pro-
ceeding, including prosecution of
McKesson.
DON’T BET ON CONFIDENTIALITY
Two recent decisions in cases arising out
of the McKesson accounting irregularities in
the federal and state courts of California sug-
gest that the chances of successfully block-
ing disclosure of a corporation’s privileged
documents to its adversaries and other par-
ties in private party litigation, following dis-
closure of those documents to the govern-
ment, are not good — despite the existence
of a confidentiality agreement with the gov-
ernment agency.
In both cases, the courts rejected the selec-
tive waiver doctrine and ruled that produc-
tion by McKesson of its attorney-client-priv-
ileged and work-product protected protected
materials to the USAO and the SEC waived
those protections as to other parties seeking
production of those documents.
In United States v. Bergonzi, the court
ordered Skadden’s report to McKesson’s
board’s audit committee and other related
documents produced to criminal defendants
fighting charges brought by the USAO,
which grew out of the transactions that
formed the subject of McKesson’s internal
investigation. The court held that the attor-
ney-client privilege never attached to the
requested documents because McKesson had
agreed to produce the documents to the gov-
ernment before they had ever been created
and because McKesson had given the SEC
and USAO full discretion to disclose the
documents under the terms of the confiden-
tiality agreements.
The court also held that although the doc-
uments were originally protected by the
work-product doctrine, McKesson had
waived that protection by producing the doc-
uments to an adversary. In reaching this con-
clusion, the court found that McKesson and
the SEC and USAO did not share a common
interest because the government entities had
not agreed to unconditional confidentiality
of the documents. The court also rejected the
selective waiver doctrine, finding it inherent-
ly unfair that a party could disclose docu-
ments to one outsider but not another.
Finally, the court concluded that the gov-
ernment entities in this case were adversaries
of McKesson and that waiver of the work-
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product protection as to one adversary con-
stituted waiver as to all adversaries. The rul-
ing is on appeal to the 9th Circuit, and the
criminal prosecution has been stayed pend-
ing that decision.
SAME FACTS, DIFFERENT CASE
In a separate case arising out of the same
facts, the California Superior Court similarly
ordered the same documents produced to pri-
vate-party plaintiffs suing McKesson and
others in California state court under the
California securities laws. Relying heavily
on the policies supporting the attorney-
client-privilege and work-product doctrines
in California, the California Court of
Appeals affirmed the decision that
McKesson had waived both the attorney-
client privilege and the work-product protec-
tion by producing the documents to the gov-
ernment.
McKesson recently petitioned the
California Supreme Court to review this
affirmance.
In both opinions, the courts rejected
McKesson’s request to recognize a selective
waiver doctrine that would have allowed dis-
closure of the documents to one adverse
party without waiving the privilege as to
other adverse parties. In so ruling, the courts
rejected the two principal arguments
advanced by McKesson.
First, both courts found that McKesson
and the government were adversaries at the
time of the disclosure — contrary to
McKesson’s argument that it and the govern-
ment were cooperating to get to the root of
the fraud, and despite that both the SEC and
the USAO eventually decided not to pursue
claims against McKesson.
For this reason, the courts held that
McKesson was not entitled to the protection
from waiver of the privileges similar to that
afforded to participants in a joint defense
agreement. Because McKesson’s production
was to an adversary, despite the existence of
the confidentiality agreement, the courts held
that the privilege was waived.
Second, both courts rejected the argument
advanced by McKesson — and also by the
SEC and the Securities Industry Association
as amicus curiae in both cases — that recog-
nizing a selective waiver exception under
these circumstances would further an impor-
tant public policy by encouraging companies
to cooperate with government investigations.
The courts reasoned that the policies
underlying the attorney-client privilege and
work-product doctrine were not fostered by
permitting disclosure of otherwise protected
material to the government.
BEWARE COOPERATION
Since it appears that McKesson’s and
Skadden’s attempt to cooperate fully with
the government while protecting its privilege
has failed, unless both decisions are reversed
on appeal, what do these recent decisions
mean to counsel faced with this Hobson’s
choice? They certainly mean that counsel
must face the possibility that if the company
decides to produce the results of its internal
investigation to the government — even
according to the terms of a confidentiality
agreement — it is quite possible, maybe
even likely, that the audit report and the
underlying documentation will later be sub-
ject to discovery in suits filed against the cor-
poration by private individuals.
Several factors will affect the likelihood
that a court will enforce the attorney-client
and work-product privileges despite the cor-
poration’s production of its privileged docu-
ments to the government. First, counsel must
recognize whether or not its corporation is an
adversary of the government. Barring unusu-
al circumstances, if your company is being
investigated, regardless of whether it is a
“target” of the investigation, courts will
probably consider it an adversary of the gov-
ernment.
If, on the other hand, the company is truly
assisting the government in an investigation
into, say, the behavior of another entity, it
will probably not be viewed by a court as
being adverse to the government. For exam-
ple, in In re M&L Business Machine Co. Inc.,
the court found no waiver of privilege by a
bank where the bank provided information
regarding M&L Business Machine Co. to
USAO pursuant to a confidentiality agree-
ment.
Of course, the stronger the confidentiality
agreement, the more persuasive it will be in
the final determination of whether the privi-
leges apply. As counsel for the company, you
will want the confidentiality agreement to
provide that the government agency will
maintain the confidentiality of the docu-
ments as broadly as possible under the cir-
cumstances, including refusing to produce
them in litigation.
Although the government agency may
agree to negotiate such a confidentiality
agreement with you, it will, unfortunately,
almost certainly not agree to the blanket pro-
tection for your documents that you would
prefer. At a minimum, the government
agency will probably insist that it be entitled
to use your documents for any purpose in the
conduct of its own investigation — which
may entail revealing the formerly privileged
documents to experts, fact witnesses, the
grand jury and others — and in any civil or
criminal actions that follow from the investi-
gation.
In addition, it may also maintain the right
to share the documents and their contents
with other government agencies. On the
other hand, the government may actually be
willing to assist you in subsequent litigation
opposing attempts by third parties to discov-
er the disclosed documents by filing an ami-
cus brief in support of your argument that
policy reasons require recognition of a selec-
tive waiver exception.
The timing of its disclosure to a govern-
ment agency may also be a factor affecting
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the eventual outcome. For example, in
Bergonzi, the Northern District of California
found it significant that McKesson had
agreed to disclose its findings and reports
even before the reports had been created.
Although other courts have found the timing
of the disclosure irrelevant, you might have
a better chance of protecting your compa-
ny’s privilege if you commence your negoti-
ation with the government after you have
completed your investigation, drafted your
report and produced it to your board.
Finally, as part of the negotiations with
the investigating agency, special attention
should be paid to defining exactly what
information will satisfy the agency’s needs.
By negotiating carefully, you might not have
to produce the actual investigation report to
the government. Rather, you might be able
to get the same benefits from cooperating
with the government by producing, for
example, a summary of the facts learned in
your investigation, without disclosing your
mental impressions and legal advice to the
board.
In the final analysis, any decision you
make to provide any information to a gov-
ernment agency, whether written or oral,
will expose your company to the possibility
that a court will later rule that it has waived
its attorney-client privilege and work-prod-
uct protection as to the information dis-
closed.
Nonetheless, by thinking carefully about
the benefits and risks involved in cooperat-
ing with the government’s investigation,
you can help the company make decisions
to maximize benefits while minimizing
risk.
This article originally appeared in the
New Jersey Law Journal, a publication of
American Lawyer Media. •